Delhi High Court
Sikkim Subba Associates vs Union Bank Of India And Anr. on 7 September, 1992
Equivalent citations: 1993(2)ARBLR140(DELHI), 1993(25)DRJ238, 1993RLR39
Author: D.K. Jain
Bench: D.K. Jain
JUDGMENT D.K. Jain, J.
(1) The petitioner, M/s Sikkim Subba Associates, a partnership firm, entered into an agreement with respondent No.2, the State of Sikkim through its Secretary (Finance), on 22 January 1991, for organising and running its Weekly Lotteries. The agreement was to be valid for a period of three years, commencing from the date of 1st draw i.e. 1 April 1991, which could be extended for such period and upon such terms and conditions, as may, at the relevant time, be mutually agreed upon.after giving to the other party a notice in writing of not less than three months. Respondent No. 2 could also rescind or modify the agreement on the detection of default or fraudulent conduct in lotteries or of any act of malfeasance or misfeasance on the part of the petitioner, after giving an opportunity of being heard.
(2) The petitioner was to maintain offices at its own expenses. Printing of tickets at the expense of the petitioner up to a gross total face value of Rs. 360 crores was to be arranged by respondent No. 2.
(3) Under the terms of the agreement the petitioner was authorised to run for and on behalf of respondent No.2, 24 Weekly Lotteries including bumper draws for which the guarantee agency fees payable to respondent No.2 was fixed at a minimum of Rs. 756 lakhs per annum, payable in 12 equal monthly Installments, for a minimum turn over of Rs. 15 crores in each lottery including its bumper draws. For every one lakh of rupees turn-over or part thereof in excess of the said turn-over for each lottery, the petitioner was to pay additional agency fee on prorata basis.In the event of failure to pay any Installment by the agreed time the petitioner was liable to pay interest at the rate of 12% per annum for each day's default subject to a maximum of 90 days and thereafter interest at the rate of 18% per annum for each day's default was to be paid. In addition thereto, the petitioner was also to pay to respondent No. 2 a sum of Rs. 75,000.00 per lottery per annum towards draw expenses.
(4) It was also stipulated in the agreement that the petitioner shall provide respondent No.2 with bank guarantee of a Scheduled Bank in the sum of Rs. 114 lakh at Rs. 4,75,000.00 of each lottery to cover the period of agreement. The lottery scheme, covered under the agreement was to be operative in phases in six groups consisting of 4 lotteries in each group and all the 24 lotteries to be operative within three months. The agency fee payable for and the amount of bank guarantee to be provided by the petitioner was split into 6 groups namely Group A to F and in respect of each of the groups for running 4 lotteries the agency fee was Rs. 126 lakhs per annum for a minimum turn-over of 60 crores in the year and in each of the groups the petitioner was to provide to respondent No.2 with bank guarantee of Rs. 19 lakhs. Any difference or dispute arising between the parties, touching the agreement, was stipulated to be referred to arbitration as per the provisions of the Arbitration Act, 1940.
(5) Pursuant to the terms of the said agreemet, at the instance of the petitioner, respondent No.1-Union Bank of India, Sadar Bazar Sarafa Market, Delhi issued two bank guarantees (subject matter of the present/suit), being Nos. 730/91 dated 14 August 1991 and 742 of 1991 dated 23 November 1991 in the sum of Rs 38 lakhs each in favor of respondent No. 2. These bank guarantee furnished under the said agreement dated 22 January 1991 are valid up to 16 August 1994 and 22 November 1994 respectively. The relevant portions of the bank guarantees are as under:- "WE,Union Bank of India, S.B.Sarafa Market, -Delhi (Hereinafter referred to "The Bank") do hereby undertake to pay the Governor/Director an amount not exceeding. Rs. 38,00,000.00 (Rupees Thirty Eight Lakhs only) against any loss or damage caused to or suffered or would be caused to or suffered by the Governor/ Director by reason of any breach by the said Sole Organising Agent of any of the terms and conditions contained in the Said Agreement." We, Bank of Inida, S.B. Sarafa Market, Chandni Chowk, Delhi, do hereby undertake to pay the amount due and payable under this guarantee without any demur merely on a demand from the Governor/Director stating that the amount claimed is due by way of loss or damage caused to or would be caused to or suffered by the Governor/Director by reason of any breach by the said Sole Organising Agent of any of the terms or conditions contained in the said Agreement, or by reason of the Sole Organising Agent's failure to perform the said Agreement. Any such demand made on the bank shall be conclusive as regards the amount due and payable by the Bank under this guarantee. However, our liability under this guarantee shall be restricted to an amount not exceeding Rs. 38,00,000.00 (Rupees Thirty Eight Lakhs only)."
(6) These two bank guarantees are sought to be invoiced by respondent No.2 vide their letter dated 8 April 1992, operative portion whereof is as under:- "WHEREASM/s Sikkim Subba Associates have been appointed by. Government of Sikkim as Organising Agents to run Sikkim State Weekly Lotteries on the terms and conditions covered by the agreement dated 22.01.91 entered into between the Governor of Sikkim through the Secretary to the Government of Sikkim, Finance Department and M/s. Sikkim Subba Associates, having its head office at Subba Building at Syari Gangtok, Sikkim. M/s Sikkim Subba Associates have violated various terms and conditions stipulated in the-above agreement and defaulted in the payment of huge sums of money towards agency fee and other money payable to the Government of Sikkim under the agreement referred herein above. Under the circumstances I request you to kindly pay Rs. 76,00,000.00 (Rupees seventy six lakhs) only, guaranteed by guarantee bound No. 730/91 dated 14.08.9l and 742/91 dated 23.11.91 within 7 (seven) days from the- date of receipt of this letter."
(7) The petitioner on coming to know of the invocation of the said bank guarantees filed the suit for permanent injunction restraining respondent No. 1, the bank, from paying any amount against the said bank guarantees to respondent No.2. Along with the suit the petitioner has filed an application under Order 39 Rules 1 & 2 read with Section 151 Civil Procedure Code seeking ad-interim temporary injunction restraining the bank from encashing and paying any amount under the said bank guarantees.
(8) While issuing notice in the application to the respondents, as ex parte ad-interim injunction restraining respondent No. 1-Bank from remitting any amount to respondent No.2 against the said bank guarantees was issued and the same continues. A detailed counter-affidavit has been filed by respondent No.2, resisting the present application. By this order I propose to dispose of this application.
(9) I have heard Id. counsel for the parties at length.
(10) It is contended by Mr. Parikh, Id. counsel for the petitioner that: (i) the invocation of the Bank Guarantees by respondent No.2 is not in accordance with the terms of the bank guarantees; (ii) respondent No.2 is in breach of terms of the agreement and, therefore, cannot be permitted to take advantage of its own wrong; and (iii) respondent No. 2 has played fraud on the petitioner and if it is not restrained from encashing the bank guarantees, irretrievable injustice would be caused to the petitioner. On the other band, Mr. Francis, Id. counsel for respondent No.2, while relying on various letters exchanged between the petitioner and respondent No.2, has submitted that despite indulgence shown by the said respondent, in not raking up the issue forthwith, the petitioner has failed to make payment, guaranteed under the agreement and on the date when the bank guarantees for Rs. 76 lakhs were invoked, in fact a sum of Rs. 401,68,505.00 was due to be paid by the petitioner to respondent No.2. He, therefore, contends that on account of the default in payments the respondent is entitled to invoke the bank guarantees. He has also contended that respondent No.2 has also to make payments against the prize winning tickets out of the money to be realised from the bank against the said bank guarantees. He is at pains to point out that in fact prize winning tickets claiming prizes, amounting to Rs. 94.90 lakhs have already been lodged with respondent No.2 for payment and the same had been seat to the petitioner for verification. He alleged that despite repeated reminders, the petitioners is withholding these tickets, with the result that payments against the prize winning tickets cannot be made.
(11) Elaborating his contentions, Mr. Parikh urges, qua the first ground, that the letter invoking the bank guarantee is very general in its terms as it neither spells -out the breach of the agreement committed by the petitioner, nor avers that respondent No.2 has suffered loss, nor does it quantify the loss caused or would be caused to the said respondent and ts, according to the counsel, invocation of the. bank guarantee is not in accordance with the terms of the guarantee and is, therefore, bad and the said respondent is not entitled to encash it. In support, reliance is placed on a judgment of this Court in M/s Mahalingam Shetty &. Co. Ltd. V. National Projects Construction Corporation Ltd. 1990 (3) Delhi lawyer 110.
(12) Mr. Parikh, elaborating grounds (ii) and (iii) urges that respondent No.2 has played a fraud on the petitioner inasmuch as the said respondent induced the petitioner to incur heavy expenditure on setting up of the offices, printing of lottery tickets and cost of paper on the understanding that the business would not be interfered with fora; period of three years; no other agent would be appointed without petitioner's consent and that in the event of default or malfeasance three months' notice and proper bearing would be given before the agreement was terminated. He points out that (a) determination of the contract initially on 31 March 1992 and finally on 11 April 1992 without notice; (b) appointment of a new agent on 10 February 1992 without petitioner's concurrence and (c) directions to printing press to stop printing of lottery tickets on 24 march 1992, prior to the termination of the contract, are not only acts in breach of contract but also tantamount to fraud perpetrated on the petitioner. To highlight the principles laid down in relation to the encashment of bank guarantees. Id. counsel has invited my attention to various judgments in this court as well as those of the Supreme Court.
(13) Since the law on the subject appear to have been settled to a great extent by a catena of judgments of the Supreme Court and this Court, I do not propose to discuss and repeat over again the basic principles relating to the law on bank guarantees enunciated therein. Suffice it to say that the contract of Bank Guarantee is a bilateral agreement between the banker and the beneficiary, taken as a sacrosanct document of title in commercial world to facilitate smooth operation of commercial contracts, irrevocable by the beneficiary consciously against the banker in terms of the stipulations as to it in the document, without reference to the performance or otherwise of the main contract, pursuant whereto, the said guarantee has been furnished. On invocation of the Bank Guarantee, as above, the bank is under obligation to honour it except where there is a clear fraud by either of the parties of which the bank has the notice or the Bank Guarantee has been obtained by misrepresentation or concealment of material facts.
(14) Taking note of the various pronouncements, this Court in Bhasin Associates Ltd. V. Hyundai Heavy Industries Co. Ltd. and another, is culled out the principles on the point, which need not be repeated here.
(15) The question relating to the bank guarantees recently came up for consideration of the Supreme Court in General Electric Technical Services Company Inc. Vs. M/s. Punj Sons (P) Ltd. and another, , wherein the observations of Sabyasachi Mukharji, J. (as his Lordship then was) in UP. Cooperative Federation Ltd. Vs. Singh Consultants and Engineers (P) Ltd. , to the effect that:- "IN order to restrain the operation either of irrevocable letter of credit or of confirmed letter of credit or of bank guarantee, there should be serious dispute and there should be good prima facie case of fraud and special equities in the form of preventing irretrievable injustice between the parties. Otherwise the very purpose of bank guarantees would be negatived and the fabric of trading operation will get jeopardised.' and "commitments of banks must be honoured free from interference by the Courts. Otherwise-trust in commerce internal and international would be irreparably damaged. It is only in exceptional cases that is to say in case of fraud or in case of irretrievable injustice be done, the Court should interfere."
have been reiterated.
(16) It is, thus, clear from the aforesaid observation of the Supreme Court and the principles called out in Bhasin Associates case (supra) that the enforceability of the bank guarantees should not be interfered with by the Court except in exceptional circumstances like fraud, special equities, invalidity of demand or irretrievable injustice. The bank is obliged to "honour its commitments under the Guarantee, without demur, free from interference by the courts, otherwise, trust in commerce, internal and/or external, would be irreparably damaged. It also needs no reiteration that the bank must pay according to its guarantee, on demand, if so stipulated without proof of conditions. As noted above, the bank guarantee is an independent bilateral contract and its encashment depends only on its terms. Thus, the sole guiding factor to determine the manner and the validity of invocation of a bank guarantee is its language/ terms.
(17) Adverting to the facts of the present case it has to be considered whether the petitioner is entitled to an injunction, as prayed. For it, it would be necessary to see as to what was the intention behind furnishing of the bank guarantees. The language of the bank guarantees, relevant portion whereof has been extracted in the earlier part of this judgment, shows that it was intended to secure the due fulfillment of the terms and conditions of the agreement dated 22 January 1991 by the petitioner. The petitioner was to manage the whole show of organising and running of the lotteries except that printing of tickets was to be arranged by respondent No. 2. It is clear from the agreement that the intention of the whole scheme was that respondent No.2 must earn a minimum fixed agency fee of Rs. 756 lakhs per annum payable in 12 monthly Installments besides some amount to wards draw expenses. The concern of respondent No.2, thus, essentially was due fulfillment of the terms of payment to it, as stipulated in the agreement, by the petitioner, for which the petitioner was enjoined and had to furnish the bank guarantee, to ensure that the petitioner made payments of the Installments of the agency fee to respondent No.2 by the due time.
(18) It is in this context that the terms of the bank guarantee regarding payment without demur on merely saying "that the amount claimed is due by way of loss or damage caused to or would be caused to or suffered.....by reason of any breach by the said sole selling agent of any of the terms and conditions contained in the said agreement......or by reason of the sole organising agent failure to perform the said agreement" have to be considered. In my considered view, on the facts of the present case, the only loss or damage which could be caused to respondent No.2, by reason of breach of any terms of the agreement, was on account of non-payment of the fixed agency fee by the fixed time.
(19) The contention of Mr. Parikh, as mentioned above is that as the letter invoking the bank guarantee neither spells out the breach of the terms of the agreement committed by the petitioner nor quantifies the loss or damage caused or likely to be caused, the invocation of the Bank Guarantee by respondent No. 2 is not valid. The contention is without any merit. The letter clearly states that the petitioner has violated the various terms and conditions as stipulated in the agreement and defaulted in the payment of the huge sums of money towards the agency fee. In my view, it is not necessary to specify the particular clause of the agreement or to quantify the extent of loss or damage in the letter invoking the Bank Guarantee, for it is not for the bank, furnishing the guarantee, to go into and examine the question, if the beneficiary is or not due anything-from the party on whose, behalf it has been furnished. Once the Bank Guarantee is invoked according-to its terms the bank has to pay without demur. The petitioner furnishing the Bank guarantee cannot say that the amount is not due to respondent No.2. Therefore, the ratio of this Court's judgment in Mahalingam Setty's case (supra) is not attracted to the facts of this case. In that case the work bad completed in 1986; the maintenance period over; defects rectified; the disputes taken to arbitration and were about to be completed, when suddenly the Bank Guarantee was sought to be invoked, which was held to be not bonafide. That apart, as per para 37 of the judgment, the Bank Guarantee in that case was not in absolute terms and thus, not irrevocable and of unconditional nature but very moderately worded, as compared to the Bank Guarantee herein. The undertaking of the Bank in the said Bank Guarantee was "to keep the Corporation (NPCC) indemnified to the extent of Rs. 19 lakhs against any amount due or any loss or damage caused to or suffered by the Corporation." In the peculiar circumstances of that case it was, thus, held (para 38) that it was incumbent on the respondent Corporation to show while making the demand as to what loss or damage had been sufferd, quantify the same and also spell out as to on account of what breach on the part of the petitioner (principal party) the same had been suffered.
(20) On the contrary, berein, the Bank Guarantee is of absolute nature. The terms of encashment are the occurrence of breach, namely, the default in payments under the agreement. It is an admitted position herein that right from the beginning when the lottery schemes commenced, remittances by the petitioner to respondent No.2 were irregular. With the counter-affidavit filed on 10 May 1992 respondent No.2 has filed copies of some correspondence exchange with the petitioner, indicating that heavy amounts has fallen due to the said respondent but the remittances therefore by the petitioner were not forthcoming despite reminders. In the said affidavit precise details of the amount due to respondent No.2 have been given. It is stated in para 15 and 16 of the said affidavit that on 12 February 1992, the said respondent wrote to the petitioner that Rs. 438.38 lakhs towards the prize money and Rs-280.19 lakhs towards the agency fee was due to them from the petitioner. The 'petitioner in its letter dated 6 March 1992, acknowledged his liability and requested the said respondent to encash another bank guarantee furnished by J & K Limited on its behalf. When the respondent invoked the said bank guarantee, the bank raised certain objections and the matter bad to be taken to Court and is still pending. These averments have not been controverter by the petitioner in its rejoinder to the said counter affidavit.The vague plea taken is that these pares relate to accounts between the parties which will be settled in the 'arbitration proceedings.
(21) It is again pointed out in pares 19 and 24 of the counter-affidavit of respondent No.2 that by 15 April 1992, the amounts due from the petitioner towards agency fee was Rs. 372.87 lakhs and towards prize money Rs. 579.13 lakhs plus interest on agency fee Rs. 28.80 lakhs. There is no denial of these facts by the petitioner in its rejoinder. Significantly, as per the information furnished at the Bar by Ld. counsel for the petitioner, the total turn over of 24 lotteries during the tenure of the petitioner as the organising agent, with effect from 26 April 1991 up to the date of termination of the contract, is to the tune of approximately Rs. 188.75 crores.
(22) As noted above, the purpose of, furnishing Bank Guarantees being to secure payment of Installments of the agency fee by the petitioner to respondent No.2; huge sums having become due to respondent No.2 from the petitioner, which facts are indicated in the letter invoking the Bank Guarantees, I am of the firm view that respondent No.2's demand set out in the letter invoking the Bank Guarantees is in accordance with the terms of the Guarantee Bond.
(23) On a second ground, Mr. Parikh submitted that respondent No.2 had committed breach of the contract, it cannot be permitted to take advantage of its own wrong, particularly in view of the term regarding interest for the delay in payment of agency fee, the non-payment of the Installment on this account within the stipulated time cannot be treated as breach of conditions of the agreement by the petitioner. I am afraid, the plea of breach of the main contract relate to the merits of the case beyond the scope of the proceedings and is within the purview of the arbitration, envisaged in the arbitration agreement between the parties, which is yet to be claimed, Suffice it to say, all what has to be seen for the purposes of issue of ad-interim injunction is whether the invocation is in accordance with the terms of the bank guarantee furnished. The decision in Decro-Wall International Sa V. Practitioners In Marketing Ltd., 1971(2) All England Reports 216, relied upon by Mr. Parikh, is not applicable to the facts of the present case and in any case cannot be taken note of at this stage.
(24) This brings me to the third ground of attack, namely the plea of fraud allegedly perpetrated by respondent No.2 on the petitioner. The contention of the ld. counsel is that respondent No.2 induced the petitioner to part with large sums of money, incurring heavy expenditure on the maintenance of the officers; its terminating the agreement illegally without notice; appointing a new agent without petitioner's consent and stopping of printing of lottery tickets, amounts to fraud and disentitles it to invoke the bank guarantee. The contention is too far fetched and cannot be accepted. The element of fraud, as envisaged in the judicial pronouncements had to be blatant and potent in magnitude. From the correspondence filed with the counter-affidavit of respondent No. 2, it is clear, prima facie, that the petitioner had his problems in running the lottery scheme right from the beginning. The petitioner in its letter dated 7 March 1992 had requested respondent No.2 to reduce the agency fee and waive interest, which shows that the petitioner felt shaky and diffident to carry on with the scheme on the existing terms and conditions. It would, in fact, be unfair to respondent No.2, which has been showing indulgence in the matter of payments by the petitioner, to hold that they have played fraud with the petitioner, for, otherwise the whole purpose of furnishing the bank guarantee will be frustrated.
(25) Having considered the whole matter thoughtfully I feel that there is no ground to hold that the notice of demand issued by respondent No. 2 to respondent No. 1 bank is invalid. The petitioner does not have a prima facie case nor the balance of convenience in its favor. There is no good ground to issue/or continue ad-interim temporary injunction restraining respondent No.1 from encashing and paying the amounts under bank guarantees Nos. 730/91 dated 14.08.91 and 742/91 dated 23.11.91 in favor of respondent No.2. The application is, accordingly, dismissed with costs. Counsel fee Rs. 2,500.00 .
(26) AD-INTERIM injunction issued on 23 April 1992 is hereby vacated.